Most businesses have evolved from the entrepreneurial initiatives of one inidual or a group of people. The idea behind such initiative is either an innovative product/ service to fill a gap in the market or a banal copy of an existing one with or without a twist. But whatever be the germinating reason, an enterprise does not become a large company from day one unless it is the sister concern of an established large enterprise. Companies have to go through the stages of small, medium and then become large albeit with different rate of growth for each company. Today, though we are constantly berating government and industry policies, banking norms, economic reform measures etc., for the stunted growth of the biggest employment generation segment – small and medium enterprises; it is the large enterprises that are significantly instrumental in impeding the growth in more ways than one. This article aims to look at the various spheres where large industries' (LEs) clout is wilting the SMEs.

Establishing an enterprise

Generating innovative ideas is not restricted to any person or business. It is about intellect, research, analytical ability, testing of hypothesis and assumptions thereby trying to come up with something new and unique. Intellect and knowledge is also required for reverse engineering and recreating the process for making an end product.

Business man

But innovation-aimed research or reverse engineering involves capital investment. This capital is either owner's own equity or part funding from financial institutions. This is the first point where LEs trump SMEs or fresh entrepreneurs.

Acquiring funding to setup a business (post idea generation) is the next hurdle along-with tying up for working capital requirement as well as loans at lower rates for land, plant and machinery. Banks and financial institutions are highly risk averse (irrespective of whatever they claim and is directed by RBI) and are cautious in extending credit to entrepreneurs and would rather allot it to large enterprises (presumably with better credibility and collateral).

Setting up a business also requires a large amount of clearance from various government and administrative departments. This again requires time and money. An international body, that rates “ease of setting up a business in various countries”, categories India in one of the difficult segments. Bureaucratic hurdles are difficult to surpass and needs liaison, legal guidance and supervision. Let us face it that this is a major obstacle. LEs find it easy to overcome these challenges due to their available manpower and financial resources. The same is slightly difficult for SMEs.  

Another hurdle in the initial stages pertains to marketing or creating a clientele. Some industries have a specific structure through which business is conducted like pharmaceuticals and others are about creating one-to-one relationship to push for sales. Business development cost can be prohibitive at times and especially challenging for novices who have little or no name or credentials to bank upon. The issue is same in case of tying up with vendors or suppliers. LEs always have it easier in these counts.

Assuming the initial steps of launching the business is conquered; the ensuing challenge is to run it on a day to day basis. This is where the clout of LEs is smothering SMEs.

Operations and Maintenance

Businesses function in a complex environment. There are many factors in play with some being in the company's internal locus of control and others not. The following diagram provides a highlight of the same.

Competition is like a continuously changing goal post which is complicated by other factors like Technology and availability of Resources like manpower and funds. Technology pushes for rapid changes in a business especially in terms of adoption and automation in manufacturing processes which can improve efficiency, overheads, cost of production and a work around for shortage of skilled manpower. But new and advanced technology comes at a cost. Who is at a better position to acquire such expensive technology? R&D is again an expensive, resource intensive proposition that generally produces results only after considerable period of time. But R&D also produces patented products which can be huge revenue generators.

It is evident that resources like skilled manpower and funds are most important for running a business. Funds are always a big issue with entrepreneurs and SMEs. Companies need to provide serious collaterals and other sinuous set of documents to prove their credit worthiness and still might not get a favorable deal. LEs on the other hand have their own funds apart from the ability to generate more from the banks. Their relationship with the bank is stronger and is perceived to be safer. The problem here is that of perception which cannot be easily influenced.

On the manpower front, recruiting and retaining good employees is a challenge in SMEs. The main reason is pay packet. But now people are looking beyond that. It is all about the entire structure of compensation which includes tangible and intangible benefits like day care, flexi-timings, canteen facilities with subsidized food, transportation, shifts etc. These are features which SMEs would find hard to match as it affects the bottom-line easily. Good employees who have honed multiple skills by working in a SME are often poached by larger organizations through lure of monetary and non-monetary benefits.

Given these facts, the LEs are in a better position to hire professionals by luring them with lucrative pay-packages and have a clear edge over SMEs who are hardly in a position to afford the ambitious professionals. What adds hurdles to the HR needs of the SMEs is that the professionals churned out by our B-schools and who have had paid heavy amounts as fees look for greener postures and are conveniently absorbed by the LEs. It is sad that we have no B-schools which make professionals for the middle or lower rung of employers in the industries. The result being the SMEs always feel crunched for their HR requirements.

LEs form strong lobby and associations which influence policy formulation at the highest levels government since they are donors to various political parties and also providing additional benefits to politicians which induce favorable decisions at the time of need. This ensures that the policies and Acts favor the large industries more than the smaller ones. Though the government pledges support and benefits for SMEs, it is the LEs which make the most out of the schemes and provisions doled out from time to time. The representation of LEs in major economic forums and platforms is always dominant and resounding. The visit of several top bosses from various business houses prior to President Obama's visit to India is a case in point. LEs are believed to be the driving forces in a growing economy though SMEs are called the backbone.

Another relatively less prominent area is pertaining to legal matters. Businesses often have to face litigation and legal hassles. The LEs are always in an advantageous position in this case. Many companies have their own in-house legal department to handle statutory and compliance issues, patents, trademarks etc. SMEs would find a simple legal case of cheque bouncing to be arduous and resource hungry activity.

The above discussion shows how the leverage enjoyed by LEs can be detrimental for SMEs. It is the sheer size and magnitude of business that creates a commanding position for LEs.

The simplest ways in which the 'clout' of LEs is impacting SMEs is presented below.

Back to fundamentals – Porter's Five Forces

The attractiveness of an industry for enterprises is best explained through Michael Porter's Five Forces model. At the heart of the model is an enterprise itself along-with its competitors. The other four forces that impact these players are the bargaining power of suppliers (vendors), buyers (clients), threat of substitutes and threat of new entrants.

SMEs compete in a space which also includes LEs. For example: Soap is manufactured and sold by both small manufacturers and HUL. Big film stars are roped in television advertisements of soaps belonging to LEs. The advertisement budget itself could be the entire business turnover of an entrepreneur manufacturing soap. LEs can compete aggressively using the power of marketing and sales force. The pricing structure can be made highly predatory to stave off competitors while generating revenue for the company. Discounts and margins to wholesalers, dealers and retailers could be highly aggressive one that SMEs would find hard to match. This can nip a lot of emerging competition at the bud.

The bargaining power of suppliers is the next factor where LEs clout over SMEs is visible. LEs are able to negotiate better payment terms from their suppliers. The credit period is also made flexible due to the quantum of purchase. The LEs are also the preferred buyers for many suppliers which would not bestow the same status to SMEs. Deliveries to SMEs are controlled and checked in case of any delays or deviation in payments. This impacts the costing of products and competitiveness in pricing.

The threat of new entrants is higher for SMEs than LEs. LEs have the option of making a bid for M&A or takeover in case a new entrant is promising. Sabeer Bhatia had sold Hotmail.com to MSN.

 

The threat of substitutes is equal for both LEs and SMEs though the strategies employed by both to tackle the threat will be different. LEs can easily come out with similar substitutes in no time in case they show promise and growth in the market. Micromax in India came out with cheap QWERTY phones which started changing the competition dynamics in the domestic handset market. Nokia has now launched similar handsets in the same price range but with the Nokia brand name advantage. Blackberry has also cut down costs of its smart phones to make inroads into the smartphone market share.

Where it hurts the most

The main clout that LEs have over SMEs which is stifling growth is in the factor where LEs are the buyers of SMEs. Most SMEs supply products and services to LEs. That is the source of their main income. First LEs exploit SMEs by delaying payment. The counter argument would be that the MSMED Act 2006 gives the provision for recovery of payment in 45 days else penalty will be charged. How many such instances can be produced where penalty has been charged in case of delayed payments? How many cases of payment defaults by LEs have been judged in favor of SMEs? The rotation of working capital gets impacted as buyers delay payments. The time value of money factor comes into play in case of delayed payment as days go by and SMEs hardly make money on their sales. If they are able to plug any losses, that is considered to be good enough. SMEs also cannot afford to totally block deliveries to companies who delay payments as certain amount of capital is already stuck and will have to be recovered. Also, the competition is much higher for SMEs and once a company blocks deliveries, the LE can access five others to fill the gap. Unless the buying company is going sick or bankrupt, deliveries continue and money gets stuck in the inventories. LEs also set stringent quality norms which are to be followed failing to do so incur withholding of payment or a margin is deducted. This does not mean that all LEs fall in the same category of 'delayed payments' or 'bad debts'. The money does come in subsequently but the liquidity crunch is felt by SMEs which impede their pace of growth. The credit rating companies and banks also view the delayed payment as a negative factor in the books of SMEs instead of considering the LEs to be deficient. This is a clear paradox. Dependency of SMEs on few large clients is considered to be a 'minus' point. So is the exposure to large number of smaller clients. LEs are never vetted on similar parameters or the importance of the same gets diluted by the sheer magnitude of operation. LEs also have the option of raising finances from the market in the form of shares which is not feasible in case of entrepreneurs or even for average SMEs. During the recent economic downturn, many companies delayed payments to its suppliers not because they did not have funds but to keep their own liquidity intact in the trying times. What recourse do SMEs have in these situations? None! Or maybe it calls for some serious lateral thinking and adventure.

Strong Handholding

 

It is imperative that LEs wield a certain amount of clout over entrepreneurs and SMEs which are stunting their growth. A considerable part of the clout is due to the size of the LEs but it has to be borne in mind that for the size the stakes are also higher. The LEs cannot be held responsible for the entire clout or advantages that they have over SMEs. The main factor where LEs clout is directly responsible for withering SMEs and detrimental to their growth is as buyers. Only a strict implementation of the 45 days clause of the MSMED Act 2006 and a proactive fast track settlement in courts in favor of will bring some change in the state of affairs. Might is right has to be systematically eliminated in the context of payments.

The recommendation of the PM Task Force for SMEs for implementing of Public Procurement Policy which reserves at least 20% government purchases from the MSMEs may spell a big sigh of relief for the SMEs. Ways and means have to be devised and thought up by our policy makers to safeguard the interests of our small and medium entrepreneurs and insulate them from the growing clout of the LEs.

The government can do a lot in this direction. For long our consumer products produced by multinationals have donned the shelves of our stores. It is to be firmly believed that our SMEs have the power and the will to compete with the LEs. All they need is the tangible backup and a strong hand-holding to rescue them from the sprawling sea of the power-wielding LEs. SMEs must be considered a separate and independent entity. It is time the backbone of our economy needs to be strengthened.

 

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